Argentina: Desperate Times Call For Desperate Measures
Here we are again. Another global economic slowdown, another spike in global risk aversion, another collapse in soy prices, and another Argentine sovereign default. Or at least that’s what the 1-year CDS is pricing in, currently trading at 4,615 basis points. That’s no joke – it now costs US$461,500 to insure US$1mn against an Argentine default, suggesting that the sovereign tops the list of countries most likely to go to the wall in 2009. I have thought for a while that Argentina was on its way to a default, or at least that it was doing its best to spend its way into some serious trouble. I am surprised though at how quickly things have deteriorated. Today, President Fernández came out and said that the government is looking to take over US$29bn of assets held by local private pension funds. The decision was apparently taken as a way of ensuring that the private pension system remains in safe hands at a time of market crisis. My translation of this is rather different. The government is strapped for cash and is willing to do almost anything to gain access to short-term funds.
Argentina – 1-Year Credit Default Swap, bps
While access to private pension funds may alleviate some short-term financing problems and ensure that the government has ample funds to spend its way to success at the 2009 local elections, the fundamental problems are not going away any time soon. The fiscal coffers are far too heavily reliant on high soy prices, economic growth is about to take a dive, and local residents are at the blocks ready for a run on the peso. Add to these issues that the government is now taking control of private pension funds at will (not to mention that the pension liabilities will have to be paid at some point), and its hard to see why anyone would lend money to the Argentine government and expect to be paid back in full.